Picard’s complaint seeks to avoid all transfers made by BLMIS to the Wilpon/Katz Group as “fraudulent conveyances”, and to recover such amounts on behalf of the BLMIS estate. Both the U.S. Bankruptcy Code and New York State law permit a trustee to recover transfers made up to six years prior to the bankruptcy case by an insolvent debtor for less than “reasonably equivalent value” or which were made with fraudulent intent. However, a “good faith” transferee can retain such property or funds to the extent it gave value to the debtor in exchange for the challenged transfer, such as the satisfaction of antecedent debt.

The Wilpon/Katz Group argued that “reasonably equivalent value” existed for the $300 million of fictitious profits that the Wilpon/Katz Group received from BLMIS. Since the account statements issued by BLMIS prior to the discovery of Madoff’s fraud evidenced substantial account balances, the Wilpon/Katz Group contends that such payments constituted the satisfaction of antecedent debt as reflected by those statements. Unfortunately for the Wilpon/Katz Group, the U.S. Court of Appeals for the Second Circuit last week squarely rejected the ability of Madoff investors to rely on the fabricated account statements for the purpose of asserting claims against the BLMIS estate, and it is highly unlikely that Judge Rakoff would view the account statements any differently in this context.

The hearing’s primary focus centered on Picard’s highly aggressive efforts to claw back $700 million of payments that were constituted the return of invested principal. Insofar as invested principal typically constitutes “reasonably equivalent value” or value given in “good faith”, Picard’s efforts turn on whether his many allegations and inferences regarding the so-called “red flags” regarding Madoff’s fraud, which he contends were willfully ignored by the Wilpon/Katz Group, add up to a level of malfeasance or knowledge on the part of the Wilpon/Katz group sufficient to vitiate “good faith”. While Picard seems to have an uphill battle on this issue, a ruling that would allow him to proceed to trial would put immense pressure to settle on the Wilpon/Katz Group. Because Judge Rakoff went ahead and scheduled a March trial date, even though he has expressly reserved his decision on the motion to dismiss, some commentators have taken this as an indication that he is going to allow Picard the chance to prove his allegations that the Wilpon/Katz Group knew or should have known about Madoff’s fraud, thus putting the entire $1 billion at risk for the Wilpon/Katz Group.

However, a trial may be necessary even if Judge Rakoff rules in favor of the Wilpon/Katz Group with respect to the $700 million. One highly material issue remarkably has received very little attention so far even from the parties themselves; in the briefs filed ahead of the hearing it was addressed solely in footnotes. Of the $300 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]”, an argument that seems discordant with his allegations about the plethora of “red flags” that the Wilpon/Katz Group supposedly ignored. A ruling by Judge Rakoff directing a trial solely on the amount of fictitious profits which may be recovered would in fact be a favorable outcome for the Wilpon/Katz Group.

Judge Rakoff probably will not rule until late September. At that time, the Wilpon/Katz Group may be looking at a trial with $1 billion at stake. Picard may just as easily be looking at a trial that would reduce his likely recovery to $167 million.

Ben Feder is special counsel in Kelley Drye & Warren's New York office. He focuses his practice on bankruptcy and restructuring matters. Mr. Feder represents bank lenders, debtors, bondholders, creditors' More

Stay Connected

About the Bankruptcy and Restructuring Group

The firm represents creditors’ committees, debtors, financial institutions, indenture trustees, bondholders, landlords, suppliers and trading partners in out-of-court restructurings, bankruptcy reorganizations, and liquidations and related litigation. Our lawyers are at the forefront in working with clients to develop and execute strategies to maximize recovery, minimize exposure and realize the best business outcome.